Stockhead – The global macro headwinds shifted in August – should small cap investors be worried?

09 Sep 2019

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The professional’s view

So, should small cap investors be wary? Can shifts in the macro environment pull the rug out from smaller companies, just as their share price is gaining traction?

Dean Fergie, director and portfolio manager at small-cap fund manager Cyan Investments, had a pretty succinct response to that gloomy question.

“The short answer is no,” Fergie said.

“We think in terms of the important factors to look at in small caps, the macro environment is further down the scale.”

“I guess the way you conceptually look at it is that any small business usually operates in a narrow niche of the global macro environment.”

“So while broad figures like GDP and consumer confidence do influence the picture overall, it tends to be micro factors that usually influence how stocks trade.”

He highlighted the latest reporting season, where the evidence suggested that moves in the stock price of a given company were driven by the earnings results, rather than macro factors.

So in terms of where the Cyan investment team spends its time, individual earnings metrics take higher priority. And importantly, investing in small-caps requires a different risk profile to begin with.

“We’re operating in a fairly high risk, high reward section of the market,” Fergie said. “People invest with us because they want to make double-digit plus returns.”

And to be an effective small cap money manager, Fergie said it’s important to maintain a capital base that allows for flexibility.

“If we have a good year we’re going to be up 30-40-50 per cent,” he said.

“And it’s to do with the fact that we’re not managing a lot of money — we’re running a fund with $50m in it so we can generate great returns for our clients.”

“You can’t do that if you’re managing a $100 billion super fund — so if we’re switching out of bonds because we want to add 20 basis points to our running yield, it’s just not relevant.”

Fergie said the main area of macro factors Cyan keeps an eye on is where they affect currency moves and changes in the Aussie dollar.

But he added that companies generating revenue outside of Australia are largely skewed towards mining and resources — a sector which Cyan doesn’t have a strong focus.

However, “if you look at the decline of the AUD in the last few months, that can move the dial. So that’s probably the broad exception”.